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5 common ISA myths busted

Myths, misinformation or just getting the wrong end of the stick – lots of people have the wrong idea about ISAs. Here we bust some common ISA misconceptions.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please
seek advice. If you choose to invest the value of your investment will rise and fall, so you could get
back less than you put in.

Georgia Tivadar, ISA Writer

9 March 2020

According to the latest figures, more than 21 million of us hold an ISA, but few have the time to trawl through all the reams of rules surrounding them.

For most, just understanding the basics is enough – you have an ISA allowance each year which you can use to shelter your savings and investments from UK tax.

Simple – yes, but it’s not the whole picture. Check you haven’t fallen for one of these common ISA myths. It could stop you missing out on a tax-saving opportunity.

This article should not be viewed as personal advice, should you be unsure if a course of action is suitable please seek advice. Tax and ISA rules change and benefits depend on individual circumstances. Unlike cash the value of investments can fall as well as rise so you may get back less than you invest.

I don’t need an ISA because I don’t pay tax on my savings and investments

Most of us have tax-free allowances for income and profits, it’s only when you go over these allowances that you pay tax.

Lots of people believe these allowances are enough, and they might be right, but we don’t think that’s a good reason to miss out on an ISA.

While your income or gains might be under the allowances now, you can’t be sure they will be in the future – either your wealth may rise or rule changes could lower or remove the allowances.

Don’t let short-term thinking get in the way. As your savings and investments build, you could find yourself with a tax problem – long after the deadline for using your ISA allowance for this year.

Also remember, you’re not just protecting yourself from tax, you’re saving yourself some admin too. As long as your savings and investments are in an ISA, you never have to worry about putting them on your tax return.

The interest rates on Cash ISAs are so poor, they’re not worth bothering with

Despite the low interest rates on offer across the board, you might be surprised to learn that Cash ISAs are actually offering relatively appealing rates. You can usually get similar rates on easy access Cash ISAs and savings account equivalents.

Even without the tax saving potential you could be better off saving into an ISA.

But when you start to consider tax, ISAs can really come into their own. If you had savings of £50,000 in a one year fixed-rate savings account paying 1.65% or in an ISA paying 1.41%, higher-rate and additional-rate taxpayers would be better off in the ISA.

I’m not planning to buy my first property for a while – so it’s not worth opening a LISA now

The Lifetime ISA (LISA) lets you save up to £4,000 a year towards your first home (worth up to £450,000) or later life, and gives you a bonus of up to £1,000 a year on top.

There are two reasons you should consider opening a Lifetime ISA as early as possible.

Firstly, you need to have had a LISA open for 12 months before you can use it to buy a property without paying any penalties. Opening an account now starts that clock.

Secondly, once you hit 40 you can’t open a LISA. If you open one at the age of 39 (even with a small sum), you’ll still be able to add money to it until you’re 50.

Getting started now will not only secure your bonus sooner, but also protect your right to a LISA and could mean that you become a home owner sooner than you expected.

If you withdraw before you’re 60 and you aren’t buying your first home, there’s usually a 25% government charge, so you could get back less than you put in.

My money is tied up in an ISA

Stocks and Shares ISAs are normally long term investments, but that doesn’t mean you can’t access your money if your plans change.

The same is generally true for a Cash ISA.

We always recommend building a rainy day pot of easy-access cash (at least three to six months’ worth of expenses) to deal with any emergencies before you tuck away money for the longer-term. Once you’ve built this up, ISAs should be on your list of accounts to consider. Withdrawals aren’t restricted like a pension but ISAs still offer shelter from UK tax.

Once I’ve opened an ISA, I’m stuck with it

While it’s true you can only pay into one of each type of ISA per tax year, you can switch ISA providers, and also switch between Cash and Stocks and Shares ISAs (and back again).

You can transfer ISA subscriptions without affecting this year’s allowance, and consolidate your ISAs with one provider. Just check your new provider accepts transfers (like we do).

Transferring an ISA isn't difficult, and it could save you time. Holding all your ISAs in one place makes it far easier to manage your money. The process is simple, just let us know you'd like to transfer and we'll take care of the rest. You’ll need to check whether you’ll face any exit penalties from your current provider, and that you will benefit from transferring.

Until the end of April, transferring an ISA is even more appealing. Transfer ISAs worth £1,000 or more and we’ll give you between £20 and £250. The money is a thank you from us – it won’t come out of your account or investments. The more you transfer, the more you receive. Terms apply.

Open or top up an ISA in minutes

Now you know more about the ISA rules, you can decide if an ISA is right for you. Once you’ve decided to open your ISA, you can usually open it within minutes online. All you need is your debit card and national insurance number to hand.

You can open or top up your ISA and invest straightaway, or, if you’re unsure where to invest you don’t need to rush your decision. You can secure your ISA allowance now with cash and make your investment decision later.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek
advice. If you choose to invest the value of your investment will rise and fall, so you could get back
less than you put in.

Our website offers information about investing and saving, but not personal advice. If you're not sure which
investments are right for you, please request advice, for example from our financial
advisers. If you decide to invest, read our important investment notes first and
remember that investments can go up and down in value, so you could get back less than you put in.